Rise in Canadian retail sales brightens economic outlook

By Leah Schnurr

OTTAWA (Reuters) - Canadian retail sales unexpectedly rose in February, the second consecutive monthly increase, brightening the outlook for an economy that is on track to rack up strong growth in the first quarter.

Separate data from Statistics Canada on Friday showed Canada's annual inflation rate dipped toward the lower end of the central bank's target range largely due to lower gasoline prices.

But economists were focused on the 0.4 percent rise in February's retail sales, which bested forecasts for a decline of 0.8 percent.

Sales volumes, which remove the effects of price changes, posted an even more robust 1.5 percent gain.

Recent data has suggested that Canada's economy slowed in February after a strong start to the year, but the retail sales report suggested the consumer sector was the exception.

Economists still expect relatively robust economic growth for the first three months of the year as the country bounces back from the slump in oil prices that triggered a mild recession last year.

"This is turning out to be a rather strong quarter for the consumer and a strong quarter overall for broad GDP growth," said Derek Holt, an economist at Scotiabank.

The Canadian dollar added to gains against the greenback immediately after the reports, while traders did not alter their expectations that the Bank of Canada is likely to keep interest rates unchanged for now. [CAD/]

Consumers bought more cars and clothes in February, though gains were broad with higher sales in nine of 11 sectors.

Canada's annual inflation rate fell to 1.3 percent in March from the previous month's 1.4 percent. Analysts had expected inflation to be 1.2 percent last month.

On a year-over-year basis, the gasoline component was down 13.6 percent. Excluding gasoline, the inflation rate was 1.9 percent.

Overall, prices were up in six of the consumer price index's eight major components, with food and shelter leading the way higher. Food prices rose 3.6 percent as consumers paid more for fresh fruit, vegetables and meat than they did a year ago.

Core inflation, which strips out some volatile items and is closely watched by the Bank of Canada, was 2.1 percent, up from 1.9 percent in February.

The central bank has an inflation target of 1 percent to 3 percent, but it has said it is looking through some of the temporary factors that are currently impacting the rate.

(Additional reporting by Fergal Smith in Toronto; Editing by Paul Simao)